Raging Bull Awards: Kagiso Equity Alpha Fund
KAGISO EQUITY ALPHA FUND
Raging Bull Award for the Best South African Equity General Fund on straight performance over three years to December 31, 2019
The Kagiso Equity Alpha Fund, which was launched in 2004, has more than R698 million in assets under management, according to the fund’s minimum disclosure document of December last year. Slightly more than 87% of the fund is invested in South African equities, with 8.8% in foreign equities.
The fund’s objective is to provide strong capital growth and return that is in the top quartile for the South African equity general sub-category.
Over three years to December 31, 2019, it was the top-performing fund in the equity general sub-category, returning 10.7% a year, on average, according to ProfileData. The fund benchmarks its performance against the average return of the funds in its sub-category. To the end of last year, the average annual return of the 153 equity general funds with a performance history of three years was 3.7%. The FTSE/JSE All Share Index returned 7.4% over the same period.
Gavin Wood has managed the fund for the past 13 years. Personal Finance asked him the following questions about the fund:
What is Kagiso’s investment philosophy when it comes to managing this fund?
Kagiso is a high-conviction manager, which means the fund will take meaningful positions in shares, and the portfolio’s composition tends to deviate significantly from the market index. Share-selection is valuation-driven – Kagiso looks for mispricing in the market. It is also contrarian, in the sense that Kagiso tries to exploit the psychology of the market: when the market is overly optimistic about a particular share or sector, Kagiso believes scepticism may be in order, but when the market is overly pessimistic, it sees a potential buying opportunity. Furthermore, as Kagiso a medium-sized asset manager, the fund is able to take material positions in shares with a market capitalisation of less than R20 billion, an example being Clover, whose share price more than doubled over the past year. Two-thirds of the portfolio is currently invested outside of the JSE’s top 50 shares. Kagiso is, however, not dogmatic about being contrarian, with the fund’s largest holding being Naspers, mainly due to it being an attractive entry point into Tencent, and also because of the potential in Prosus’s investments in online classifieds and payments.
To what factors do you attribute the fund’s out-performance over the past three years?
The outperformance was as much a result of the shares the fund avoided, which disappointed other investors, as the inexpensive shares it held that went up. Particularly strong performers were in the platinum group metals (PGM) sector, Datatec (which has more than doubled over the past three years), Altron (which has tripled in value), Clover and Old Mutual (as it separated).
The fund’s PGM holdings (including Amplats, Northam and Royal Bafokeng) have been particularly strong performers. The PGMs include platinum, palladium and rhodium, which are essential components in automotive catalytic converters, for which there are no substitutes. South African mines are responsible for a significant amount of the global PGM supply, and the lack of investment in new mines has resulted in supply-growth constraints ahead. Demand for these metals is growing and tends not to change too much when metal prices rise.
The fund generally stayed away from retail, healthcare, food-production and telecommunications companies, believing these shares to be expensive. The fund also successfully avoided investing in companies that led to huge losses for their shareholders, such as Steinhoff, Aspen, Brait and EOH.
Kagiso is particularly circumspect when companies are pursuing an aggressive acquisition strategy, while being led by a charismatic chief executive and present the market with poor financial disclosure.
What opportunities and challenges will the fund face over the coming year, and, following from this, how will you be positioning the fund?
Kagiso is generally pessimistic about the prospects for the South African economy over the medium term, due to the lack of significant policy reforms, fiscal weakness and high unemployment. Domestic-facing shares are included in the portfolio only if they are exceptionally cheap or if they have the potential to unlock value for shareholders by restructuring or corporate action. Fortunately, there are many JSE-listed companies with prospects linked to economies offshore, where conditions are essentially buoyant. The fund holds a meaningful exposure to such companies where they are inexpensively priced at present.